When it comes to splitting up retirement accounts as part of a divorce, the path of least resistance isn’t always the safest. Take the case of Jeremy Ray Summers v. Commission, T.C. Memo 2017-125.
As part of a divorce, the petitioner sought to simplify the division of the couple’s IRA account. The couple agreed to split the account 50/50. But instead of utilizing any sort of legal judgment (in this case a Transfer Incident to Divorce), the petitioner simply withdrew all the funds from his IRA and gave his wife half.
Unfortunately, this action also triggered IRS scrutiny and the assessment of a 10% early withdrawal penalty. The petitioner objected, on the grounds that the withdrawal was directly related to the divorce, per IRC §72(t)(2)(C) for distributions made to an alternate payee via a qualified domestic relations order (QDRO).
The tax court disagreed, citing two facts. One, that the distribution went directly to the petitioner rather than his wife as the alternate payee. And two, even though the petitioner had good intentions, he failed to strictly adhere to the tax code when he skipped the court order or decree for the division.
This case makes clear that when dividing retirement accounts of any kind during or after divorce, using a QDRO (or similar document for accounts like IRAs) is the only way to avoid assessment of penalties.